How Does the World Bank Explain Japan’s Continued Stagnation?

Another downward revision

As it did with other advanced economies, the World Bank has reduced its economic growth forecast for Japan in the June 2016 edition of its flagship Global Economic Prospects report. It now expects the Japanese economy to grow by just 0.5% in 2016, which represents a sharp downward revision from the 1.3% the bank projected in its January report. For 2017, the pace is expected to be 0.5%, which is 0.4 percentage points lower than the bank’s January estimates.

Current drivers

The World Bank noted that the Japanese economy “continues to fluctuate between periods of modest growth and contraction.” Among the negative aspects, the bank pointed out weak private consumption and exports.

Consumption has also been slower than gains in real income, which has also seen unspectacular growth. Meanwhile, even after a sizable depreciation in the Japanese yen against the US dollar, exports have remained weak due to lackluster global demand.

On the other hand, the primary positive for the Japanese economy has been its labor market. The World Bank noted that the unemployment rate in Japan is a little over the 3% mark, that the active job openings-to-applicants ratio has risen, and that there actually seem to be labor shortages.

Other areas of concern

Japan’s aging population remains a cause of worry and could potentially drag down economic growth. Also, although monetary policy measures have been quite accommodative and have pushed interest rates into negative territory, it has failed to stoke inflation in the economy.

The World Bank expects fiscal policy to provide some support for Japan this year. It also believes that if the government defers a hike in the consumption tax to 10% from April 2017, it could boost growth in the short-term but hurt fiscal consolidation.

Investment implications

Japanese equities (MTU) (MFG) (IX) had a tremendous 2015. However, 2016 has not been generous to them. Monetary policy accommodation has been beneficial to equities in phases, but its effectiveness is now in question.

Meanwhile, inflation has failed to surface and may not do so until structural reforms and fiscal accommodation provide support. However, as seen from above, fiscal accommodation will delay fiscal consolidation.

At this juncture, the Japanese administration needs check in with its priorities. But it’s safe to say that Japanese equities (EWJ) (DXJ) (DBJP) may deliver in a short-term burst rather than with any consistency.

Now let’s look at what the World Bank has to say about emerging economies.